PROSPECTS FOR THE CHINA-EUROPE RELATIONSHIPAND GLOBAL IMPLICATIONS

Kent E. Calder

Japan-U.S. Exchange Program

Prospects for the China-Europe Relationship and G

lobal Implications

PROSPECTS FOR THE CHINA-EUROPE

RELATIONSHIP AND

GLOBAL IMPLICATIONS

ByKent E. Calder

Director, Reischauer Center for East Asian Studies SAIS/Johns Hopkins University

Washington, D.C.

2

CONTENTS

LIST OF FIGURES ......................................................................................................... 3

FOREWORD .................................................................................................................. 6

I. CLASSICAL PATTERNS OF INTERACTION .................................................. 10

II. EUROPE’S POST-COLD WAR TRANSFORMATION ..................................... 18

III. EMERGENCE OF THE NEW CONTINENTALISM ....................................... 44

IV. STRUCTURAL TRANSFORMATION OF A RISING CHINA ........................ 60

V. DOMESTIC POLITICS AND THE SINO-EUROPEAN RELATIONSHIP ..... 74

VI. THE CHANGING PROFILE OF TRANS-CONTINENTAL TRADE AND

INVESTMENT .................................................................................................... 84

VII. EUROPE, CHINA, AND GLOBAL FINANCE .................................................. 94

CONCLUSION .......................................................................................................... 102

3

LIST OF FIGURES

LIST OF FIGURES

FIGURE 2-1: THE WARSAW PACT IN THE TWILIGHT OF

THE COLD WAR ............................................................................... 19

FIGURE 2-2: THE POST-COLD WAR TRANSFORMATION OF CENTRAL

AND EASTERN EUROPE, 1990-1992 .............................................. 20

FIGURE 2-3: THE EASTWARD EXPANSION OF NATO, 1990-2016 .................. 21

FIGURE 2-4: EUROPE’S EXTENSIVE EAST-WEST GAS GRID ........................... 23

FIGURE 2-5: EXPANSION OF THE EUROPEAN UNION, 1990-2016 ................ 25

FIGURE 2-6: THE EURO AREA, 1999-2016 ........................................................... 27

FIGURE 2-7: HIGH DEBT TO GDP RATIOS IN THE MEDITERRANEAN

EU NATIONS ..................................................................................... 28

FIGURE 2-8: THE UKRAINE CATALYST FOR EURASIAN CHANGE ................ 31

FIGURE 2-9: THE EUROPEAN CATALYST: SANCTIONS AGAINST

RUSSIA ................................................................................................ 32

FIGURE 2-10: DEEPENING MEDITERRANEAN EU TRADE DEPENDENCE

ON CHINA ......................................................................................... 35

FIGURE 2-11: CHINESE INVESTMENT IN THE EU’S SOUTHERN TIER ......... 36

FIGURE 3-1: LATENT ENERGY FOUNDATIONS FOR EURASIAN

CONTINENTALISM.......................................................................... 45

FIGURE 3-2: CLASSICAL CRITICAL JUNCTURES

AND EURASIAN INTERDEPENDENCE ........................................ 46

FIGURE 3-3: PROSPECTS FOR FUTURE ENERGY INTERDEPENDENCE ...... 47

FIGURE 3-4: A DEEPENING EAST-WEST GAP IN PERSIAN GULF OIL

DEPENDENCE ................................................................................. 48

4

FIGURE 3-5: THE CENTRAL POSITION OF CHINA

ON THE EURASIAN CONTINENT ................................................ 50

FIGURE 3-6: EURASIAN ECHO EFFECTS:

CHINA’S ONE BELT, ONE ROAD INITIATIVE.............................. 52

FIGURE 3-7: THE ARCTIC OCEAN AND THE FAR EAST

IN EAST WEST RELATIONS ............................................................ 54

FIGURE 3-8: THE NORTHEAST PASSAGE ........................................................... 55

FIGURE 4-1: CHINA’S GEOGRAPHIC CENTRALITY WITHIN EURASIA ....... 61

FIGURE 6-1: NEW OVERLAND TRANSIT TRADE ROUTES FROM EUROPE

TO ASIA .............................................................................................. 87

FIGURE 6-2: GLOBAL PORTS AND TERMINALS WITH A CLEAR CHINESE

STAKE ................................................................................................. 88

FIGURE 6-3: CHINESE MONEY AND THE EURO CRISIS ................................. 90

FIGURE 7-1: A EUROPEAN CORE TO CHINA’S INCREASINGLY GLOBAL

AIIB ...................................................................................................... 97

FOREWORD

6

FOREWORD

Europe and China stand half a world apart: they lie at the antipodes of Eurasia. The two

represent the core of contrasting civilizations, which have enjoyed only sporadic and inter-

mittent past contact with one another. Their relationship suffers from a complex heritage of

both cultural distance and past imperialism. Yet Europe and China are growing ineluctably

closer—in social, economic, and even political dimensions, with fateful long-term implica-

tions for the broader structure of world affairs.

How Europe and China evolve, both internationally and in their relationship with each

other, matters greatly for world affairs, because they are the largest entities in the interna-

tional system, apart from the United States. The European Union, with a GDP of $18.5

trillion, generates about 24 percent of the global product, while China contributes another

13 percent. Together, they make up 37 percent of global output, compared to 22 percent

for the United States.1 And given the huge population, rapid growth rate, and still-low per

capital income level of China, as well as the substantial growth potential of Europe also, it is

likely that the Sino-European aggregate will wield increasing weight in world affairs in the

years to come, should it have any substantial coherence of its own.

How that Sino-European relationship evolves, and what influence it enjoys on the

global scene, will naturally be shaped not only by international forces, but by domestic

developments as well. The Greek debt crisis and the Chinese stock-market volatility of

2015-2016, not to mention Britain’s June 2016 decision to leave the European Union, all

illustrated the domestic uncertainties that continue to prevail. Brexit, in particular, could

have a profound impact on the Sino-European relationship of the future, as we shall see,

although it will take some time for the concrete implications of Brexit to clearly manifest

themselves.

This monograph review the evolution of Europe’s relations with China since ancient

times, placing those relations in global context. It pays particular attention to post-Cold War

changes in European security relations and financial structure, arguing that the expansion of

1 Figures for GDP at market prices, in current US$, at the end of 2014. In PPP terms, the GDPs of the European Union and China together were 34 percent of the global total. “The Chinese economy” in this case excludes Hong Kong and Macao. Source: The World Bank.

7

FOREWORD

NATO, and the currency integration that followed the Maastricht treaty created not only a

more unified continent, but a more fragile one as well. Post-Cold War Europe, it is argued,

has assumed a political-economic structure that renders it receptive to and potentially reli-

ant on trans-regional relationships with large outside powers. China is one such candidate.

As China rises, Sino-European financial and diplomatic relations will likely deepen, with

fateful implications for global political-economic architecture, which are considered in the

following pages.

Almost any piece of quality research is the work of many hands. That is certainly true in

the case of this monograph. Yun Han and Alex Evans, Reischauer Policy Research Fellows at

the Johns Hopkins University/SAIS Reischauer Center for East Asian Studies, have played a

central supportive role. They have done an outstanding job of critiquing the ideas presented

here, finding supporting data, and reinforcing the arguments made with additional graphic

presentation. Michael Kotler, Sophie Yang, and Jaemin Choi have also provided valuable

assistance. Any failings in the work remain the responsibility of the author alone.

Kent E. Calder

Washington, D.C.

July, 2016

CHAPTER ONECLASSICAL PATTERNS OF

INTERACTION:

FROM VOLTAIRE, MALRAUX, AND ZHOU ENLAI

TO THE EUROPEAN UNION

10

CHAPTER ONE: CLASSICAL PATTERNS OF INTERACTION

China and Europe are close to geographically contiguous, across the sprawling Eurasian land

mass. Yet they have been economically and politically remote from one another throughout

most of recorded history. And they have not known one another well in cultural terms,

despite the periodic infatuation that so often correlates with distant acquaintance. The

interpersonal contact of China and Europe, intimately entwined with the history of the Silk

Road, dates back at least to intermittent trade between Han China and the Roman Empire

two thousand years ago. From its onset around 130 BC, when the Han officially opened

trade with the West, the trading network known as the Silk Road was used regularly until

1453, when the Ottoman Empire boycotted trade with the West, and closed the routes. The

establishment of sea routes to the East by Vasco da Gama and others, around the end of the

Fifteenth Century, further confirmed the demise of the Silk Road.2

Trade between Europe and China along the Silk Road over the past two millennia

has ebbed and flowed in intensity. Yet in both good times and bad, it has generally been

conducted through intermediaries. For the first half and more of Silk Road history, from

the pre-Christian era until the Middle Ages, Europe and China knew each other only quite

indirectly, through the stories of Sogdians, Parthians, and other traders, whose partners in

turn dealt with the major party at the other end. One of the first Europeans who actually

seems to have experienced China at length and popularized his views was Marco Polo, writ-

ing in the Thirteenth Century.3

Polo had the rare opportunity of travelling freely from Europe to China and back due

to the unusual political stability and openness provided, ironically, by the brutal Mongol

Empire. The Mongols had invented the passport and inhibited the numerous brokers and

middlemen who more normally limited Silk Road transactions and travel. Following their

expulsion from China with the collapse of the Yuan Dynasty in 1368, direct intercourse

between Europe and China became much more difficult. It was not until the Sixteenth

2 Joshua J. Mack, “Silk Road”, Ancient History Encyclopedia, at: http://www.ancient.eu/Silk-Road 3 L.F. Benedetto, and Aldo Ricci. The Travels of Marco Polo. Florence: Taylor and Francis, 2014.

11

CHAPTER ONE: CLASSICAL PATTERNS OF INTERACTION

Century that direct European relations with China began to revive once again, this time

through the efforts of Jesuit missionaries. They saw, in the huge Chinese population, a

bountiful potential harvest of souls for the Christian faith.

Among the most active and articulate of these Jesuits was another Italian, Matteo Ricci,

who lived in China for nearly three decades, from 1583 to 1610.4 Ricci, as Jonathan Spence

points out, “admired the industry of China’s population, the sophistication of the country’s

bureaucracy, the philosophical richness of its cultural traditions, and the strength of its

rulers.”5 His meticulously detailed journals provide one of the best early European accounts

of classical China, albeit from the laudatory perspective that was quite standard in Europe

until at least the mid-Eighteenth Century.

The French Jesuits, who dominated Christian interaction with China during the early

Qing period (late Seventeenth Century), especially late in Kangxi’s reign (1661-1722), were

even more laudatory of Chinese practices and potential than their Italian counterparts had

been. Behind this approach was a clear appeal to the “Sun King”, Louis XIV, to back their

efforts with more money and personnel.6 The French Jesuits highlighted, in particular, the

Confucian Classics, whose ethical content, they argued, showed that the Chinese were a

profoundly moral people. At one point, the Jesuits maintained, Chinese had practiced a

form of monotheism so close to the Judeo-Christian tradition, that they should be natural

converts to Christianity.

For two centuries and more, the works of the Jesuits on Chinese government and soci-

ety were the most detailed available in Europe. They profoundly shaped European views of

China, even as Jesuit influence waned in Europe itself, with the order being suppressed alto-

gether in 1773. As the Eighteenth Century Enlightenment era dawned on the Continent,

Europe’s view of China remained very much the positive one that Ricci and the French

Jesuits had espoused. Both the German philosopher Gottfried Wilhelm von Leibnitz and

his French contemporary Voltaire, for example, read and reflected on the works of the early

4 On Ricci’s views of China, see Jonathan D. Spence. The Memory Palace of Matteo Ricci. New York: Penguin Books, 1984.

5 Jonathan D. Spence. The Search for Modern China (second edition). New York: W.W. Norton, 1991, pp. 132-133.

6 Ibid, p. 133.

12

missionary commentators in detail, although the anti-cleric Voltaire brilliantly reinterpreted

their laudatory view of Chinese moral probity, contending that it demonstrated clearly why

Christianity need not be the basis of a moral society, since the Chinese were not Christians.7

Voltaire’s fascination with China reflected a broader European cultural sympathy of

his age that reflected another common trait in trans-continental Euro-Chinese relations: a

tendency to view the Other through the prism of one’s own frustrations and hopes for the

future. Europe in the mid-Eighteenth Century was at once opening to the outside world and

teetering on the verge of revolution, seething with the frustrations of social transition—in

some respects like the Europe of the 1960s, two centuries later. China presented a large and

distinct alternative paradigm, whose attraction lay precisely in its ambiguity and freshness.

A cult of China, literally chinoiserie, spread broadly across Europe—far beyond the

socio-political sphere. “In prints and descriptions of Chinese houses and gardens, and in

Chinese rugs, silks, and colorful porcelains,” as Spence points out, “Europeans found an

alternative to the geometrical precision of their neoclassical architecture and the weight of

baroque design.”8 Chinese aesthetics powerfully influenced everything from French rococo

design to the pagodas that were erected in public parks, the sedan chairs that the wealthy

used for transport, and the lattice work surrounding ornamental gardens.

With the Enlightenment, however, also began an anguished socio-political debate in

Europe over China’s true nature, and the implications for Europe’s relations with that enig-

matic nation. That debate has continued to be a hallmark of the Eurasian trans-continental

relationship to this day.9 Voltaire and Leibnitz were generally complimentary toward China.

Rousseau and Montesquieu, however, were sharply critical.10 The latter argued that, for all

their cultural sophistication, the Chinese did not enjoy true liberty; that their laws were

based more on fear than on reason; and that their elaborate educational system could well

lead to the corruption of Chinese morals rather than to its improvement.

The Enlightenment debates of the Eighteenth Century thus eerily prefigured the

7 Ibid.8 Ibid., p. 134.9 On mutual perceptions in the Sino-European relationship, see David L. Shambaugh, Eberhard Sand

Schneider, and Hong Zhou. China-Europe Relations: Perceptions, Policies, and Prospects. London: Routledge, 2008.

10 Spence. The Search for Modern China (Second Edition), p. 134.

13

CHAPTER ONE: CLASSICAL PATTERNS OF INTERACTION

intellectual confrontations, over issues ranging from human rights and the status of the

Dalai Lama to high-technology trade, that continue to roil the Sino-European relation-

ship today.

Deepening Yet Contested Interdependence

However intimate Europeans and Chinese felt their mutual relationship to be in the Age

of Enlightenment, it evolved by quantum leaps in succeeding years, at an accelerating pace

from the 1960s on that has over the past five years taken on some dimensions of entente.

The European Union today is China’s largest trading partner, and China is the Union’s #2,

following only the United States. Cross investment is surging, with Chinese direct invest-

ment in the EU rising 111 percent during the 2003-2013 decade alone.11 The Eurasian

continent and even the Arctic are beginning to offer increasingly attractive transit possibil-

ities. European and Chinese leaders hold annual summit conferences, and the Europeans

shocked Washington in late 2014, by eagerly joining the Asian Infrastructure Investment

Bank (AIIB) organized by China, that did not include the United States.12

To understand where the increasingly dynamic Sino-European relationship stands

today in the broadest sense, and how it will evolve in future, it is useful to recall where

that trans-continental tie has been in the recent past. After the cultural intimacy of the

Enlightenment, China and Europe fell into a more distant and ambivalent relationship with

the rise of European imperialism. In 1842, as a result of the first Opium War, the British

annexed Hong Kong, and unequal treaties with France, Germany, Czarist Russia, and even

Japan were to follow. And the Soviet Union followed its czarist predecessor into neo-imperi-

alism, stationing the Red Army in the strategic Liaodong peninsula of Manchuria for nearly

a decade after World War II.

Even as it brought China and surrounding nations under its imperial yoke, Europe

also nurtured and gave voice to the nationalists and revolutionaries who ultimately ended

colonial and neo-imperial rule across the continent. Both Zhou Enlai and Deng Xiaoping,

11 UNCTAD bilateral direct foreign investment statistics. 12 Jamil Underline, “UK move to join China-led bank a surprise even to Beijing”, Financial Times, March

26, 2015.

14

together with Ho Chi Minh and other future East Asian leaders, studied and worked in

Europe, especially in France, where many of their revolutionary movements were incubated.

Indeed, the Communist Parties of both China and Vietnam were founded in Paris during

the early 1920s; both Deng and Ho picketed for Asian self-determination at the Versailles

Peace Conference.

In 1949, in Mao Tse Tung’s immortal words from the Gate of Heavenly Peace atop

Tienanmen Square, China stood up. Europe, despite its imperialist heritage, responded

more flexibly and favorably than did the United States, with Britain recognizing the PRC

in early 1950. In June 1954, the UK and China formally established diplomatic relations

at the level of charge d’affaires, upgrading those ties to the ambassadorial level in March

1972.13

Most of continental Europe moved more slowly than Britain, but faster than the United

States. One landmark development was Sino-French cross-recognition in 1964, followed by

the triumphal visit to Beijing of the French Minister of Culture, whose seminal work La

Condition Humaine (Man’s Fate) had sympathetically and eloquently portrayed the Chinese

Revolution. Once again, France was leading Europe’s intellectual engagement with China.14

It was not until 1972 that Nixon visited China, and not until 1979 that US relations with

the People’s Republic of China (PRC) were formalized.

Most nations of Central and Eastern Europe, of course, have longstanding and rela-

tively intimate relations with the People’s Republic of China, dating from soon after the

1949 revolution, as a result of their membership in the Soviet bloc of the Cold War years.

Even after the Sino-Soviet split in the late 1950s, smaller Warsaw Pact nations such as

Rumania and Hungary maintained friendly ties with China, as part of their continuing

effort to balance and inhibit their huge Soviet neighbor. All these countries, of course,

are now members of the European Union. Albania went so far, after 1960, as to establish

a full-fledged, if informal, military alliance with the PRC, to counter Soviet regional

influence in Europe.

Despite superficial parallels to the past, today’s Sino-European relationship is

13 Embassy of the People’s Republic of China in the United Kingdom of Great Britain and Northern Ireland, “Overview of China-UK Relations”, May 10, 2010, at: http://www.chinese-embassy.org.uk.

14 Andre Malraux. Man’s Fate

15

CHAPTER ONE: CLASSICAL PATTERNS OF INTERACTION

qualitatively different from that of the pre-Cold War period, in ways that profoundly

enhance its potential for the future. First of all, there is a sophisticated institutional struc-

ture for interaction, much of it multilateral, and thus involving a broad range of European

nations. That structure facilitates political-economic contacts, gives them predictability, and

helps to insulate them from the anguished intellectual debates over China’s political system,

which have wracked Europe since Voltaire and Rousseau.

The central interlocutor with China is the European Commission, founded in 1975.

This supra-national actor stands above the politics of individual nations, providing a tech-

nocratic, apolitical dimension that helps to stabilize the relationship, complemented by

the European Central Bank, founded in June 1998.15 ASEM (the Asia-Europe Economic

Meeting), founded in 1996, provides an ongoing “Track 1.5” structure for interaction

among government officials, academics, and NGOs. In the security sphere, NATO, based

in Brussels, provides another technocratic contact point, albeit one with sensitive geopolit-

ical implications.

IN CONCLUSION

Europe and China lie at the opposite ends of Eurasia, by far the largest continent on earth.

They represent the core of two contrasting civilizations, arguably the most influential in the

world, that have had only sporadic past contact with one another. Their relationship suffers

from a complicated heritage of both cultural distance and past imperialism. Yet these two

areas are becoming closer, in multiple dimensions, with potentially important long-term

implications for the architecture of international affairs.

The interaction of China and Europe is an old one, intimately entwined with the

history of the Silk Road. It goes back at least to intermittent trade between Han China and

the Roman Empire two thousand years ago. For the first millennium and more of that rela-

tionship, it was conducted mainly through intermediary trading kingdoms, many of whom,

such as the Sogdians and the Parthians, have disappeared in the sands of time.

15 Hans Peter K. Schaller. The European Central Bank—History, Role, and Functions. Frankfurt am Main: European Central Bank, 2004.

16

From the Thirteenth Century, the trans-Eurasian relationship grew more dynamic,

driven by the Mongol conquests and the fragile political-economic order which they created.

Two centuries after Marco Polo Jesuits such as Matteo Ricci reached and began reporting

on China, followed by European traders at the port of Canton. These relationships evolved

over time not only into deeper cultural contacts, but also into imperialism, including the

Opium Wars and Britain’s occupation of Hong Kong in 1842.

Meanwhile, in Europe, a distant China was becoming both a cultural fascination and,

especially in France, a paradigm for characteristics that Europeans either feared in them-

selves or desired to emulate. Voltaire, Rousseau, Montesquieu, and Leibnitz all pronounced,

during the Enlightenment, on Chinese characteristics, without direct personal contact.

With the coming of the French Revolution and the ensuing continent-wide turbulence,

however, consciousness of China in Europe receded, even as the age of imperialism quietly

began to dawn ten thousand kilometers to the east across the Eurasian continent.

Europe responded more flexibly to the Chinese revolution of 1949 than the United

States, with Britain recognizing the PRC soon after its establishment, and France following

in 1964. With the establishment of the European Commission in 1975, relations began to

take on a new multilateral dimension. Multilateral institutions such as ASEM, linking both

Europe and China, have proliferated since then, while trade and financial ties have steadily

deepened. It has been fateful structural changes in Europe over the post-Cold War years,

however, leveraged by recent Chinese economic growth, that have brought Sino-European

ties to a qualitatively different stage. It is to these developments, and their broader global

implications, that we now turn.

CHAPTER TWO

EUROPE’S POST-COLD WAR

TRANSFORMATION

18

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

Since the 1980s, just over a quarter century ago, the European Union has undergone a

little-noticed yet fundamental transformation, with major implications for the evolution

of EU-China relations. Most importantly, it has expanded greatly in geographic terms, to

twenty-eight members, including two new and distinctive groups of countries, with inter-

nal political-economic traits and historical experiences that contrast significantly to those

of the original Cold War West European Six16 and Nine.17 Those two new entrant groups

included: (1) nations of Eastern and Central Europe, formerly under Communist rule, who

joined in 2004 and after; as well as (2) Mediterranean countries, including Spain, Portugal,

and Greece, which joined between 1981 and 1986, following their democratization.

The transformations of the 1980s and 1990s in the political-economic profile of

Europe are best seen against the backdrop of what existed before. As indicated in Figure

2-1, a unified Soviet Union extended, until nearly the end of the 1980s, into the very heart

of Europe, including the Baltic states, Byelorussia (later Belarus), and the Ukraine within

its national borders. Beyond its own borders, the USSR was surrounded on the west by six

satellite buffer states—all members of the Warsaw Pact, which the Soviets dominated. Even

though Yugoslavia had seceded from the bloc in 1948, with Albania leaving informally in

1960 to become a Chinese ally,18 the Soviets continued until late 1989 to dominate Central

and Eastern Europe, both politically and militarily.

16 The Six include the original signatories to the Treaty of Rome in 1957: France, the Federal Republic of Germany, the Netherlands, Belgium, Luxembourg, and Italy.

17 The additional three Cold War entrants were Britain, Ireland and Denmark, which all joined the EU in 1973.

18 Albania formally left the Warsaw Pact in 1968, eight years after it first sided with China in the Sino-Soviet split.

19

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

FIGURE 2-1: THE WARSAW PACT IN THE TWILIGHT OF THE COLD WAR

Source: https://en.wikipedia.org/wiki/Iron_Curtain#/media/File:EasternBloc_BasicMembersOnly.svg

Serious trouble began for the Warsaw Pact in mid-1989, when the Communist regimes

of Poland and Hungary crumbled, in June and October of 1989 respectively. The collapse of

the Berlin Wall in November 1989 led to even more dramatic, sweeping, and geopolitically

significant changes in the political-military profile of Central and Eastern Europe. First of

all, the remaining Communist regimes of the Soviet satellite states collapsed, in quick suc-

cession, during the spring and summer of 1990—only months after the Wall went down, as

indicated in Figure 2-2.19 With the Soviet-linked German Democratic Republic rendered

politically unviable, nearly half a million Soviet troops were withdrawn from Germany, and

the country was reunified on October 3, 1990.20 Yugoslavia collapsed, and six fledgling suc-

cessor nations were born on its territory during 1991. The political-military changes west

of the Soviet frontier came to an end with the collapse of the Communist regime and the

ascent of the Democratic Party to power in Tirana, Albania during March 1992.

19 The East German regime collapsed in March, 1990, followed by those of Romania (May, 1990); Bulgaria (June, 1990); Czechoslovakia (June, 1990); and finally, over the course of 1990, the constituent republics of Yugoslavia—socialist, but not a Warsaw Pact member.

20 “Reunification of Germany”, The Cold War Museum, at: http://www.coldwar.org/articles/90s/reunification_of_germany.asp.

20

FIGURE 2-2: THE POST-COLD WAR TRANSFORMATION OF CENTRAL AND EASTERN EUROPE, 1990-1992

Source: https://en.wikipedia.org/wiki/Iron_Curtain#/media/File:EasternBloc_PostDissolution2008.svgNote: Both Figure 2-1 and Figure 2-2 were originally found in “Iron Curtain,” Wikipedia, https://en.wikipedia.org/wiki/Iron_Curtain#Iron_Curtain_speech

The most dramatic and significant changes of all began occurring in the spring of 1990,

within the borders of the Soviet Union itself. First, two Baltic states—Latvia and Lithuania,

seceded from the USSR, followed by twelve of the other former Soviet republics. Finally, at

the end of 1991, the Soviet Union itself was dissolved, and the Russian Federation formally

took its place.

As the Soviet bloc collapsed, a power vacuum emerged in Central and Eastern Europe.

Following the widespread collapse of Communist regimes across the region, democratic

governments emerged in most countries. These fledgling new administrations manifest both

ideological affinity with fellow democracies to the West, and simultaneously a strong desire

to consolidate their new westward-leaning political-economic orientation, with parallel and

reinforcing ties to the West as well. This new situation led, as indicated in Figure 2-3, to a

historic expansion of NATO into areas that had long fallen within the Warsaw Pact, and

even within the borders of the Soviet Union itself.

21

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

FIGURE 2-3: THE EASTWARD EXPANSION OF NATO, 1990-2016

Source: Author’s recreation of https://en.wikipedia.org/wiki/NATO#/media/File:History_of_NATO_enlargement.svg

The post-Cold War NATO expansion into Central and Eastern Europe occurred in

four phases. The first phase involved the reunification of Germany in 1990; the newly con-

solidated nation emerged as a full-fledged NATO member, albeit one in which the presence

of foreign military forces was limited to the western part of the country— conforming to an

understanding with the Russians accompanying the withdrawal of the Red Army from the

former German Democratic Republic. This was the only change in NATO’s configuration

for nearly a decade, despite the sweeping political-economic transformations in the former

Communist nations of the region.

The collapse of the Soviet Union, as well as the satellite regimes, did, however, create a

major political vacuum in the region, that the United States, with the daughter of a former

Czech diplomat, Madeleine Albright, as Secretary of State, was not surprisingly tempted

to help fill. In 1999, Poland, the Czech Republic, and Hungary all became members of

NATO, bringing the Western alliance to the borders of the former Soviet Union. Boris

Yeltsin was still president of the Russian Federation, leading a nation just re-emerging from

a serious financial crisis, and Yeltsin did not mobilize effective opposition.

22

In 2004, NATO undertook an even more ambitious move, welcoming four Central

European nations (Slovenia, Slovakia, Romania, and Bulgaria), as well as three republics of the

former Soviet Union (Latvia, Lithuania, and Estonia) into its ranks. This step definitively con-

firmed the dissolution of the Soviet Union, and extended Western defense protection to areas

that had fallen within the USSR’s formal boundaries until 1991. Russian President Vladimir

Putin had publically declared the collapse of the Soviet Union to be the greatest tragedy of

the twentieth century, and this new gesture by the Western alliance rubbed salt into Putin’s

psychological wounds. A few months later, the Orange Revolution in the Ukraine deepened

Western intrusions into the former Soviet space, triggering deep geopolitical apprehensions in

Moscow of Western encroachment that have reportedly continued to this day.21

In 2009, NATO expansion resumed, extending this time to the Balkans. Croatia and

Albania joined the Atlantic alliance in that year. Seven years later, in July 2016 Montenegro

joined NATO as well.22 NATO thus now includes as members virtually all of Europe west

of Russia, Belarus, and Ukraine, except four successors of the former Yugoslavia (Serbia,

Bosnia, Macedonia, and Kosovo), as well as the traditional neutrals (Switzerland, Austria,

Sweden, and Finland) of Cold War days.

This steady expansion of NATO has been, for the fledgling Central and Eastern

European democracies concerned, a felicitous development. It has reassured them against

a resurgence of Russian aggressiveness and intimidation from the East, with the decline in

country risk leading to substantial new foreign investment, and a welcomed surge of eco-

nomic growth in many cases. At the same time, however, it has compounded the lingering

Russian resentment at the West for the diminution of great-power standing that accompa-

nied the collapse of the Soviet Union.

The Russians retain substantial geo-economic leverage against the new eastern mem-

bers of NATO. Most of those members, for example, are heavily dependent on Moscow

21 Ukraine’s Orange Revolution took place between November, 2004 and January, 2005, with sweeping implications for subsequent Russian foreign policy. See Jeanne L. Wilson, “The Legacy of the Color Revolutions for Russian Politics and Foreign Policy”, Problems of Post Communism, Volume 57, No.2, 2010, pp. 21-36.

22 Montenegro was formally invited by NATO to begin accession talks on December 2, 2015, and formally joined NATO at the July, 2016 Warsaw summit. See “Relations with Montenegro: Milestones in Relations”, NATO, at: http://nato.int.

23

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

for energy supplies. None of the new members, save Romania, have major domestic energy

reserves, while embedded infrastructural links, such as the ironically named Druzhba

(Brotherhood) gas pipeline, link them closely to their Russian neighbor to the east, as indi-

cated in Figure 2-4.23 Russia is also an important market for many of them, including even

powerful Germany, with respect to both agricultural products and manufactures.

FIGURE 2-4: EUROPE’S EXTENSIVE EAST-WEST GAS GRID

Source: EurogasEconomist.com/graphicdetail

Some eastern members of NATO, especially the Baltic states, are also vulnerable in

political-military terms. One of the former Soviet Union’s most important western bases,

23 The twenty-eight nations of the EU average around 24 percent reliance of Russian gas, with that share reaching 100 percent in Lithuania, Latvia, Estonia, and Finland, as well as more than 50 percent in nine other nations. See “Putin’s pipelines”, The Economist, April 3, 2014.

24

Kaliningrad, lies sandwiched between Poland and Lithuania. In part to avoid provoking the

Russians, there are no major NATO defense facilities in the Baltic states, and Russian forces

in the region greatly outnumber their Baltic counterparts. To make the situation even more

delicate and combustible, all of the Baltic states have substantial Russian ethnic minorities

frustrated at the collapse of the Soviet Union and their sudden relegation to second-class

citizenship status.24

Economic Transformation of Europe and its Global Implications

Even as the expansion of NATO was transforming the post-Cold War profile of Europe in

the political-military realm, parallel developments in trade and finance were radically alter-

ing the political-economic face of Europe as well. As indicated in Figure 2-5, the European

Union expanded from six members in 1957, to thirteen by 1990, when the major post-

Cold War transformations began, and ultimately to 28 members today. In its post-Cold

War expansion, the EU took in virtually all the new members of NATO, and a few other

states as well.25 This EU expansion created arguably the largest multinational trading bloc

in the world.

24 Ethnic Russians make up a large share of the populations of Latvia (27 percent); Estonia (25 percent); and Lithuania (5 percent). See Jan Pull, “The Baltic Front: Where Putin’s Empire Meets the EU”, Spiegel Online, July 3, 2015, at: http://www.spiegel.de.

25 Norway and Montenegro were in 2016 members of NATO, yet not the EU, while Austria, Sweden, and Finland were conversely members of the EU but not of NATO.

25

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

FIGURE 2-5: EXPANSION OF THE EUROPEAN UNION, 1990-2016

Author’s recreation of https://upload.wikimedia.org/wikipedia/commons/6/6c/Evolution_of_the_European_Union_SMIL.svgNote: Britain in June, 2016 voted in a national referendum to leave the European Union, although as of late 2016 it had not submitted formal withdrawal documents

Even more fateful than the expansion of the European Economic Community, with its

common trading area and provisions for regulatory harmonization, was its ambitious steps

toward financial integration. In 1992, the Maastricht Treaty committed the core members

of Europe to currency integration, with both intensified and stabilized, at least in the short-

run, their trade and financial interdependence. The treaty also mandated an increased level

of fiscal and regulatory coordination as well. Following the actual birth of the Euro in 1999

with eleven members26, followed by expansion to nineteen members by 201527, the new

26 Those original members included Austria, Belgium, Finland, France, Germany, Iceland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. See Cynthia Kroft, “A timeline of the euro’s growth”, Politico, December 26, 2014.

27 Additional euro members include Greece, which joined in 2001; Slovenia (2007); Cyprus and Malta (2008); Slovakia (2009); Estonia (2011); Latvia (2014); and Lithuania (2015). See Ibid.

26

monetary integration initially led to a spurt of growth in the new member nations, both in

Eastern Europe and the Mediterranean. Governments, businesses, and consumers all rushed

to avail themselves of the lower interest rates and expanded borrowing opportunities that

flowed almost miraculously from the monetary union.

As indicated in Figure 2-6, not all members of the European Economic Community

elected to join the Euro, or, indeed, were invited to do so. Conspicuously, the United

Kingdom, although a core member of the EU, decided to retain the pound sterling as its

national currency, while aligning it closely with the Euro under a controlled float28. Sweden,

Denmark, and several nations of Eastern Europe also failed to join the common currency,

thus retaining added flexibility in their monetary and fiscal policies. Fatefully, however, the

Mediterranean members of the EU—Greece, Spain, and Portugal, together with EU core

member Italy—did not avail themselves of this option, despite the indifferent productivity

and fiscal discipline prevailing in many of their economies. These Mediterranean states

thus gained the short-run benefit of greater financial flexibility—the opportunity to borrow

extensively, at a variety of levels, from EU banks, while also retaining easy access to EU debt

markets. At the same time, however, financial integration created the long-term prospect of

serious political-economic crisis, if the fiscal and monetary policies of individual member

nations were called into question. And the shadow of Brexit complicates EU vulnerabilities

still further, even if Britain has not itself been a member of the Euro-zone.

28 The British electorate voted in a June, 2016 national referendum to actually leave the EU, although the UK government did not immediately submit withdrawal documents to EU authorities.

27

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

FIGURE 2-6: THE EURO AREA, 1999-2016

Source: European Central Bank

With the growth that followed post-Cold War EU expansion, however, came a steady

expansion of debt. This took a variety of forms—government and corporate borrowings;

real-estate lending; and household finance. Quantitatively, the debt was naturally con-

centrated in the nations with the largest economies. There was, however, a little-noticed

but geopolitically important corollary, presented in Figure 2-7: relative to GDP, the debt

came to be concentrated heavily in the nations on the periphery of the EU—especially

in Mediterranean countries with unusually fragile economies, such as Greece, Cyprus,

Portugal, and Italy.

28

FIGURE 2-7: HIGH DEBT TO GDP RATIOS IN THE MEDITERRANEAN EU NATIONS

Source: Eurostat

EU Expansion: Implications for the Changing EU-China

Geopolitical Calculus

Fresh EU entrants from the “New Europe” thus fall into two broad categories: former

Warsaw Pact members, such as Poland, the Czech Republic, and Hungary; as well as former

constituent parts of the Soviet Union itself until the early 1990s. The latter group includes

the Baltic states (Estonia, Latvia, and Lithuania). These newly empowered actors had a long

history of independence themselves before being absorbed into the Soviet Union by Stalin

in 1940, although they also included within their borders large minority ethnic Russian

populations, most of whom had settled in the Baltics during half a century of Soviet rule

(1940-1991).

The Varied Utilities of China for the New Europe

The “New Europe” members of the EU, including both Warsaw Pact-era satellite nations

and successor states of the Soviet Union, share two distinctive traits deriving from Cold

29

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

War days: (1) positive traditional relations with China, with whom they traditionally bal-

anced, to increase autonomy from the former Soviet Union; and (2) delicate, often hostile,

relations with Russia, their former imperial master, dominated by a fear of renewed Russian

geopolitical assertiveness. The “New Europe” thus provides distinctively strong geopolitical

support for deepened relations with China, apart from the economic motives often stressed,

even as it also introduces a pronounced cautionary note into the EU’s relations with Russia.

Indeed, the very ambivalence about neighboring Russia’s renewed assertiveness under

Vladimir Putin intensifies the New Europe’s interest in having far-off China as a balancer;

the more threatening Russia becomes, the more attractive China therefore seems to be.

The second group of recent post-Cold War EU entrants—admitted in part to balance

the enhanced influence of Berlin flowing from German reunification in 1990—was some-

what different from the first. Spain, Portugal, and Greece, who all entered the EU in the

1980s, had not been part of the former Soviet bloc. They thus failed to share either the

New Europe’s strong trade and inter-personal relations with China, nor its Socialist heri-

tage. The new Mediterranean members were nominally democratic (a condition of entry

into the EU). Yet they were also still fragile democracies, with traditionally interventionist

militaries, strong labor unions, weak bureaucracies, and a rich tradition of civic distrust of

government. China, as its economy grew in size and strength, held increasing attraction for

those countries, as an economic supporter and stabilizer.

China and Europe’s Transformation

The deepening Sino-European relationship flows from developments within China, as well

as the historic post- Cold War changes in Europe that are outlined above. Chinese growth,

first and foremost, has made the PRC a more and more attractive market for Europe, while

enhancing China’s ability and inclination to invest in Europe also. The Chinese economy,

after all, is now ten times as large, in purchasing power parity (PPP) terms, as it was in 1990;

it passed the US in that important measure of economic scale during 2014, to rival the EU

itself as the largest economic unit on earth.29

29 “GDP, PPP (constant 2011 international $), World Bank website, at: http:// data.worldbank.org

30

Trade between the two poles of Eurasia has soared, to the point that the EU is now

China’s largest market, absorbing 16 percent of China’s total exports, and providing 12

percent of its imports.30 China is also the EU’s largest market apart from the United States,

with the PRC’s share of European exports doubling from 5 percent in 2003 to 10 percent in

2014.31 In 2005, China also surpassed the US, to become the EU’s largest supplier of goods.

Trade thus plays a key role in solidifying Sino-European trans-continental ties.

Three Recent Critical Junctures Catalyze a New Sino-European

Relationship

Throughout the 1990s and 2000s, Sino-European relations continued to deepen—in trade,

investment, and cultural relations. Yet so too, under the pressures of globalization, did China’s

relations with North and South America, as well as Africa, and Europe’s ties with Southeast

Asia, and with South America as well. The general pressures of globalization were operating

to propel trans-regionalism throughout the world, with deepened Eurasian ties just one of

many manifestations of a broader worldwide trend toward enhanced interdependence.

Six critical junctures since the mid- 1970s, as we have seen, gave birth to the increas-

ingly integrated geo-economic playing field that is the New Eurasia. These CJs included

China’s Four Modernizations (1978); the Iranian Revolution (1979); the Indian interest-rate

reforms (1990-1991); and the collapse of the Soviet Union (1991)32. Since late 2013 two

new CJs—one a security development and the second an economic phenomenon-- have

accelerated the pace of regional integration; meanwhile, Brexit has generated major uncer-

tainties for both processes. All these could critically shape the evolution of Sino-European

relations.

The first of these recent yet fateful developments was the Ukraine crisis, erupting

first in November 2013,33 whose geographical flashpoints are depicted in Figure 2-8. The

30 International Monetary Fund. Direction of Trade Statistics, at: http://data.imf.org. 31 Eurostat, “Extra-EU trade by partner”, at: http://ec.europa.eu. 32 For more details on these fateful developments which created an increasing interdependent Eurasia, see

Kent E. Calder. The New Continentalism, pp. 47-9933 “Ukraine crisis: Timeline”, BBC, updated on November 13, 2014, at: http://www.bbc.com.

31

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

Yanukovich administration rejected the prospect of affiliation with the European Union,

provoking sustained protests on the Maidan, Kiev’s central square, that spiraled upward

into violence and ultimately revolution. The pro-Russian regime was deposed, replaced

by a militantly anti-Putin coalition, with whom an escalating conflict ultimately provoked

Russia’s March 2014 annexation of the Crimea, and Western sanctions. Those in turn led to

intensified East-West military confrontation—not only in the Ukraine, but also involving

intensified pressure on the Baltics, and other recalcitrant parts of the former Soviet Union.

FIGURE 2-8: THE UKRAINE CATALYST FOR EURASIAN CHANGE

Source: ”Ukraine in graphics: Crisis in Ukraine”, The Economist, June 4, 2015.

East-West tensions over the Ukraine have enhanced Sino-European relations in several

ways. First, they have seriously eroded Russian ties with Europe, thus forcing the Russians into

the arms of the Chinese. This has given China more leverage in Central Asia, long a Russian

preserve, as well as in Belarus, making it easier for the Chinese to use the former Soviet Union

as a transit way-station to Europe, even as its intrinsic economic importance declines under

the weight of international sanctions, whose configuration is presented in Figure 2-9. Tensions

over the Ukraine have also made China more geopolitically attractive to the Europeans as a

prospective balancer against an increasingly proactive Putin administration.

32

FIGURE 2-9: THE EUROPEAN CATALYST: SANCTIONS AGAINST RUSSIA

Source: Author’s recreation of https://en.wikipedia.org/wiki/International_sanctions_during_the_Ukrainian_crisis#/media/File:Sanctions_2014_Russia2.png

The Ukraine crisis and resultant Western sanctions against Russia have also pro-

voked the Putin administration to pursue cooperative policies toward China that are fur-

ther accelerating the progress of Eurasian continentalism, and thus indirectly facilitating

Sino-Russian economic integration as well. In May 2014, for example, Russia’s Gazprom

and China’s CNPC concluded a $400 billion, thirty-year natural-gas supply agreement in

Beijing;34 Putin visited Beijing again in September 2015 for China’s World War II Victory

Day commemoration.35

In June 2015, China signed deals with Moscow to build a Russian domestic high-speed

rail line between Moscow and Kazan, on the Volga.36 Meanwhile, Russia also took initiatives

to strengthen the Eurasian Economic Union of Russia, Belarus, and Kazakhstan.37 The net

34 “Gazprom, CNPC sign 30-year natural gas supply contract”, Oil and Gas Journal, May 21, 2014.35 Jonathan Caiman, “Who’s who (and who isn’t) at China’s big parade”, Los Angeles Times, September 2,

2015.36 Paul Sonnet, “China to Design New Russian High-Speed Railway”, Wall Street Journal, June 19, 2015.37 Russian Prime Minister Putin went so far as to suggest a single currency to supplement free-trade

arrangements. See Jon Stone, “Putin suggests single currency for Eurasian Economic Union”, The Independent, March 20, 2015.

33

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

effect of these trade and infrastructural deals, ironically, was not so much to generate auton-

omous Russian development in the face of Western sanctions, as to facilitate a counter-in-

tuitive outcome: deepening Sino-European ties, which are being consolidated for reasons

unrelated to Russian interests.

Strategic Implications for the Eurasian Future

Looking forward, it appears that the tensions unleashed in the Ukraine crisis, on both the

Russian and Western European sides, could be quite fundamental. They call into ques-

tion the longstanding concept of a “common European home”, espoused by both Russian

and European leaders since the late Cold War days of Mikhail Gorbachev. Coupled with

expanded Russian military pressures against the Baltic states and Poland--- now members

of NATO— those tensions also call into question the credibility of the Western alliance

itself. The NATO allies cannot easily back down in the face of Russian pressures. And the

Russians, themselves threatened by the strategic dangers that they perceive from an alliance

already intruding into the heart of the former Soviet Union, cannot easily avoid pressuring

the West to withdraw.

China, in contrast to Russia, is hardly challenged by the new strategic reality drama-

tized by the Ukraine crisis. A NATO ensconced in the heart of the former Warsaw Pact, and

indeed increasingly in the very heart of the former Soviet Union itself, does not challenge

Beijing the way it does Moscow. To the contrary, this new reality presents expanded leverage

for China, since it can remain on good terms with both Russia and Europe, even as these

European powers feud with one another. And since the new reality of a NATO expanded

eastward is structural, this situation is quite basic, and likely to institutionalize both Russo-

European tensions and related Chinese opportunities in Europe, for years to come.

China and the Crisis of the Euro

A second recent critical juncture, qualitatively different from the Ukraine crisis, yet nev-

ertheless also reconfiguring the Sino-European relationship, is the intermittent crisis of

the Euro. This has bubbled on episodically since 2010, affecting all of the Mediterranean

34

countries (Spain, Portugal, Cyprus, and Italy, as well as Greece). It came to a head, how-

ever, in the Greek financial difficulties of 2015. As with the Ukraine crisis before it, the

Greek crisis has its roots in an ambitious political-economic effort to bind the nations of

Europe together that ran into serious difficulty. And as in the Ukrainian crisis also, a rap-

idly rising China—the largest creditor nation in the world, with well over $3 trillion in

foreign-exchange reserves -- looms as an important and empathetic potential stabilizer for

Europe, in contrast to the impotence or perverse intentions of Russia, and the reticence

of the United States.

In relation to the Ukraine crisis, and the broader geostrategic problem of protecting

the vulnerable Central and Eastern European states from Russian encroachments, China’s

role is only implicit, as a balancer on Russia’s eastern flank. In relation to the crisis of the

Euro, however, China’s potential role is much more direct. The Euro zone has expanded, for

geopolitical reasons, to include nations, many of them Mediterranean, that find it difficult

to adjust socio-politically to the austere, frugal policy standards of Northern Europe. The

result of this disjunction has been periodic financial crises in the southern-tier Euro mem-

bers, as they struggle with chronic budget deficits and with structural reform.

With the introduction of the Euro in 1999, and its steadily broadening usage across the

continent, the fates of the stronger economies of northern Europe came increasingly linked

with the success of the weaker ones to the south. China has become increasingly important

in trade and investment terms to the nations of the European south, which also have par-

ticular geopolitical attraction for Beijing, given their proximity to major global sea lanes.

Thanks to Chinese growth and eagerness to engage, each of the Mediterranean nations has

grown increasingly dependent on China over the past five years, even as dependence on

Japan has significantly fallen, as indicated in Figures 2-10A and 2-10B.38

38 China surpassed Japan as both ‘export destination’ and ‘import origin for the four major Southern European countries in the early 2000s, just after joined the WTO. See IMF. Direction of Trade Statistics.

35

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

FIGURE 2-10: DEEPENING MEDITERRANEAN EU TRADE DEPENDENCE ON CHINA

(A)

(B)

Source: IMF, Direction of Trade Statistics

Direct foreign investment has followed a similar pattern. Capital outflows from China

to the European Union as a whole have accelerated substantially in the past decade, as

indicated in Figure 2-11. And relative to the size of local economies, the flows have been

especially large since 2007 to the nations of the Mediterranean—Europe’s vulnerable

southern tier—even though these countries have also experienced lower growth and higher

36

inflation than their brothers to the north.39 Interestingly, those flows have been sharply

less to Ireland—a target of the 2010 financial crisis, but not on the Mediterranean—than

to the southern tier. China, in short, has been increasingly important in propping up the

weaker nations of the European Union—a role that naturally brings it more importance

and appreciation not only in the weaker nations themselves, but with EU authorities in

Brussels as well.

FIGURE 2-11: CHINESE INVESTMENT IN THE EU’S SOUTHERN TIER

Source: Data from AEI/Heritage Foundation, “China Global Investment Tracker”, at: http://aei.org.

China’s overall investment in the EU has grown explosively, from just $100 million

in 2005 to $27.6 billion in 2015, as indicated above. The sectoral composition of recent

Chinese investment in Europe is as interesting as its magnitude. There are, of course, the

luxury investments in Bordeaux vineyards. Yet more striking are the heavy investments

in infrastructure, with construction being the area of most intense Chinese investment in

Europe. This investment seems to have been most intense during 2010-2013, just after the

39 Roughly 1/3 of Chinese investment in the EU has flowed to the four major southern European countries, which generated only 23 percent of EU GDP in 2014, according to World Bank statistics.

37

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

Lehman crisis, with a relatively heavy portion concentrated in Balkan and Central European

countries outside the EU itself.40

Such investments within the European Union will likely lay the groundwork for still

deeper Chinese political-economic involvement with Europe in future years, while enhanc-

ing Chinese geopolitical influence as well. A clear example of how Chinese investments can

lay the basis for greater future influence is the port of Piraeus, directly adjacent to Athens,

with respect to which the US in the early 1970s concluded an agreement to homeport US

forces, and ultimately an aircraft carrier,41 around the same time as a decision was made to

homeport the Midway in Japan. Unlike the US-Japan case, the Piraeus homeport agreement

was only partially implemented, due to differing views between the US and Greece of opti-

mal arrangements, and the US soon abandoned its efforts.42 Yet those efforts did suggest

the strategic and logistical importance that the US attached to Piraeus during the Cold War.

More than three decades after the US Navy withdrew, China Ocean Shipping (COSCO),

China’s largest shipping company, arrived in Piraeus. Since 2009, it has invested nearly

$5 billion in this strategic Greek port. COSCO currently owns two of the major piers at

Piraeus, with a 35-year lease on broader facilities. And in April 2016, China Cosco Holding

Company formally purchased a 67 percent share of the Piraeus Port Authority as a whole.43

China is also financing substantial infrastructure northward into the Balkans. Current

projects include two highways in Macedonia,44 and the principal Belgrade to Budapest

high-speed rail line.45 China is also investing heavily in infrastructure still further north, in

Belarus and Poland, as we will see in greater detail in the next chapter.

40 Ibid.41 In a January 8, 1973 agreement between the US and the Greek navies, the Greek government granted

home-porting facilities to serve around 9000 US military personnel and dependents, assigned to escort ships, and ultimately to a carrier. See Stephen G. Xydis, “Coups and Counter-Coups in Greece, 1967-1973”, Political Science Quarterly, Volume 89, No. 3, 1974, pp. 507-538.

42 US Defense Secretary James Schlesinger postponed the second stage of homeporting, involving the carrier deployment, in the mid-1970s, and the concept was never revived. See US Department of State. Foreign Relations of the United States, 1973-76: Greece, Volume XXX, Document 10.

43 “Greece sells Piraeus port to Chinese bidder”, Deutsche Woleaian 8, 2016.44 “Macedonia Taps Chinese Loan for Motorways”, Balkan Insight, October 1, 2013.45 This will be financed by the Export-Import Bank of China. See a Baijiu, “High-speed rail set for Hungary,

Serbia”, The State Council of the People’s Republic of China, November 25, 2015, at: http://english.gov.cn.

38

Building the Economic Highways to Europe

There is little question that Chinese trade with and investment in Europe itself is rapidly

expanding, both absolutely and relative to Chinese economic involvement in other parts

of the world outside developing Asia.46 This is true even though Europe is a formidably

long distance from China, across a Eurasian landmass that traditionally has been neither

economically or politically hospitable to transit travel. Beijing, after all, lies over 4600 miles

from Berlin, and the western reaches of the continent in the Iberian Peninsula lie nearly

1200 miles further away.

Despite the raw distance, however, transit travel from China, across Eurasia, to Western

Europe and back has begun to accelerate rapidly since the beginning of 2011, capitalizing

on the dramatic differences in shipping time (as little as ¼ in recent cases in favor of over-

land rail as opposed to sea) between inland China and central Europe.47 In January 2011, a

railway route connecting Chongqing and Duisburg in Germany was opened.48 In 2013, the

first regular, direct line between China and Europe was inaugurated, connecting Chengdu

in Szechuan and Lodz, Poland. Scheduled overland shipping routes from the massive logis-

tical hub of Yiwu in China’s Zhejiang province to Madrid in Spain have been operating

since November 2014.

Cargo flights between China and Europe have also been rapidly expanding. Air China

Cargo, for example, opened two new air routes, from Shanghai to Amsterdam and Frankfurt

respectively, in March 2013.49 Large new transit air-cargo facilities like Navoi in Uzbekistan

are also being erected along the way, to accommodate the increased air freight across the

continent, mainly from China to Europe and back.

Cargo traffic is rising across Eurasia, between China and Europe, in part due to the ris-

ing scale of trans-continental trade, including bulky items such as industrial machinery and

46 The EU’s share of Chinese foreign direct investment outflows beyond developing Asia rose from 8 percent of that total in 2003 to 23 percent in 2012. See UNCTAD. Bilateral Foreign Direct Investment Statistics.

47 Wade Shephard, “Why the China-Europe ‘Silk Road’ Rail Network is Growing Fast”, Forbes, January 28, 2016.

48 “Regular cargo trains link Chongqing, Germany’s Duisburg”, Xinhua, April 8, 2014, at: http://news.xinhuanet.com.

49 “Air China Cargo opens two new European freight routes”, Supply Chain, March 26, 2013.

39

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

heavy electronic equipment, that travel more easily by rail. Rising Chinese plant investment

in central Europe—as well as European investment in the interior of China—is also inspir-

ing greater movement of capital goods for building and equipping new factories. China

has, after all, rapidly become the manufacturing hub of the entire world, and an increasing

share of its industry is emerging in such inland centers as Chengdu, Chongqing, and Xian.

Trade between China and Europe, however, has been substantial for well over three

decades. Yet little of it, until recently, moved by land, despite the clear geographical benefits

of doing so. The overland route from China to Central Europe is less than half as long as

that by sea, and lately takes only a quarter of the shipping time.50Yet until recently the land

alternative was little used.

What one really needs to ask is why the recent shift from sea to land transport between

Europe and China—or from Europe to Northeast Asia more generally-- is at last occur-

ring. This has four central aspects. First, transport technology is changing. Secondly, cus-

toms clearance is growing easier. Thirdly, infrastructure itself is physically improving. And

finally, inland centers of both China and Europe have been developing with unaccustomed

speed—for domestic, as well as for international reasons.

Technological change is doubtless reducing transport costs. Container shipping is grow-

ing cheaper and more efficient, while cargo trains are growing faster and more powerful. Yet

an even greater catalyst for trans-continental transit trade comes from increasingly efficient

border clearance procedures. Massive clearance centers, like Horgos on the Chinese-Kazakh

frontier, have arisen, fostered by multilaterals like the Asian Development Bank, and sup-

ported by computerization, which process cargo rapidly and much more transparently

than even a few years ago. The inauguration of the Russian-inspired Eurasian Economic

Union in January 2015 now means that there are effectively only two land frontiers to be

crossed—the newly streamlined China-Kazakh border and the frontier between Belarus and

the European Union—between the Pacific and the Atlantic, across Eurasia. And both west-

ern China and Central Europe—the areas now being fatefully linked by trans-continental

infrastructure—are both overcoming their longstanding economic under-development.

50 The distance between the Port of Chongqing and that of Duisburg, Germany is around 24,167 kilometers. Yet the equivalent railway distance is only 11,179 kilometers. See http://ports.com; and http://www.infinitycargo.com.

40

Taken together, these four important changes in the political-economy of overland

transit trade between China and Europe are accelerating the attractiveness of interdepen-

dence across the continent itself. So are developments around the continent, along another

long-neglected but increasingly promising transit route: that across the Arctic itself. Like

overland transit across Eurasia, the northern sea route between China and Europe has sub-

stantial geographic attraction, cutting 35 percent off the sailing distance between Shanghai

and Hamburg, for example.51

Due ironically to the generally perverse consequences of global warming, the northern

seas from the Bering Strait to Murmansk and beyond are growing passable, albeit still with

icebreaker support. In 2012, 46 commercial vessels, with over 1.2 million tons of goods on

board, traversed the northern sea lanes, initially mostly between Russian ports. In 2013, the

number of commercial passages along the full Arctic sea route rose by 54 percent. COSCO,

among others, has announced plans for a regular shipping route between China and Europe,

which could cut as much as ten days, or 7000 kilometers, from that lengthy voyage.52

In June 2016, the British electorate voted narrowly, in a national referendum, to leave

the European Union. Despite strong pressured from Brussels for clarity, British leaders did

not immediately tender a formal withdrawal, despite the referendum outcome. Yet the

Brexit vote did presage major changes in both the profile of European integration and in

overall European relations with China.

From an intra -European perspective, Brexit intensifies the burden on Germany to sus-

tain financial and political economic equilibrium on the continent, even as it intensifies the

uncertainties that the EU as a whole confronts. Britain, the second largest economy in the

EU, and heretofore a market -oriented partner, will be gone. And nationalist pressures for

their own withdrawal, from within same of the weaker remaining members, such as France

and Spain, could well intensify.

From a trans-continental perspective, China’s underlying interest in Europe will

undergo little change. The PRC’s interest in Britain, the first nation to join the AIIB, and to

issue sovereign bonds in renminbi, is primarily financial. And London’s attractive offshore

51 “COSCO announces Arctic shipping route to Europe”, Japan Times, October 27, 2015.52 Ibid.

41

CHAPTER TWO: EUROPE’S POST-COLD WAR TRANSFORMATION

financial infrastructure, which inspired emergence of the Euro- dollar half a century ago,

remains largely impact, despite Brexit. For Britain, China’s attractions as a growing market

could loom even larger than before, as EU accesses grows more difficult. Certainly, Anglo-

Chinese financial ties have been growing rapidly in recent years.

For the continent as well, China’s attractions will also remain, and even intensify, espe-

cially for Germany. The Germans will have heavier burdens within the EU, making China’s

support for infrastructure and in other financial dimensions, more attractive. For China,

both geopolitical and economic logic will make European continental technology and dip-

lomatic ties of continuing interest. With Europe divided, China may be able to extract ever

better terms than before, from both Britain and the continent.

IN CONCLUSION

New transit routes across and around Eurasia, between China and Europe, are thus rapidly

growing both more numerous and easier to use. These developments are rapidly drawing

Europe and China closer together, and are synergistic with the financial and industrial com-

plementarities described earlier. Structural transformations of early post-Cold War days

now embedded in the political economy of Europe, including the expansion of NATO

and the birth of the Euro, create serious, fundamental strategic tensions between Europe

and Russia that render impractical Mikhail Gorbachev’s idealistic dream of a “common

European home”.

At the same time, these historic changes create a natural space for steadily deepening Sino-

European relations, routed in the need for global financial stability, that even the United States

cannot realistically oppose. Those deepening ties across Eurasia, in turn, give the continent

the sheer mass and integrity in global geo-economic terms that Mackinder foresaw a century

ago, leading both Eurasia and the world ever closer to potential reconfiguration of the global

geo-economic chessboard. The intra-European divisions created by Brexit appear unlikely to

meaningfully affect this tendency, relations with either Britain or continental Europe. Indeed,

they may actually accelerate the pace of transcontinental interaction.

CHAPTER THREEEMERGENCE

OF

THE NEW CONTINENTALISM

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CHAPTER THREE: EMERGENCE OF THE NEW CONTINENTALISM

China’s ties with Europe are undeniably deepening. That intensification of ties is driven

not only by rising Chinese economic capabilities and diplomatic assertiveness, but also by

important structural transformations and critical junctures within Europe itself, as we have

seen. Yet these fateful new developments between the two poles of Eurasia need to be seen

in a much broader systemic context. They cannot be understood solely as the product of

China’s rise, or of Europe’s frailties and aspirations for autonomy from Washington alone.

Indeed, as we shall see, a major reason that the deepening ties of Europe and China hold

such long-term importance for the global future is that they involve the concrete manifesta-

tion in the political-economic realm of a latent geo-economic reality: that adjacent areas of

the Eurasian continent— including but transcending Europe and China—have symbiotic

potential relations with one another that have not been developed.

In May 2012, I published a book, based on nearly five years of previous research, point-

ing to the profound underlying economic complementarities prevailing across the Eurasian

continent, and the critical junctures in the political realm that were opening the prospect

of deeper interdependence.53 Five months later, Professor Wang Jisi of Beijing University,

an influential advisor to the Chinese government, published a widely noted monograph

stressing the importance to China of trans-continental diplomacy.54 And in October 2013,

President Xi Jinping formally announced China’s new “One Belt, One Road” initiative,

with important addresses in Kazakhstan and Indonesia.55

Since President Xi’s announcement of the “One Belt, One Road” (OBOR) initiative,

the ambitious promotion of infrastructure projects linking China with Eurasian continen-

tal destinations to the west, by both land and sea, has been widely recognized as a central

element of Chinese foreign policy. Before considering the details of the OBOR initiative

53 Kent E. Calder. The New Continentalism: Energy and Twenty-First Century Eurasian Geopolitics. New Haven: Yale University Press, 2014.

54 Wang Jisi, “March West: China’s Geopolitical Strategy of Rebalancing”, Global Times, October 17, 2012.

55 Scott Kennedy and David A. Parker, “Building China’s ‘One Belt, One Road’”, Center for Strategic and International Studies, April 3, 2015, at: http://csis.org.

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CHAPTER THREE: EMERGENCE OF THE NEW CONTINENTALISM

and its geostrategic significance, however, it is important to understand the reasons why the

initiative emerged at this time, and why China and other Eurasian nations are pursuing it

so energetically. It is also important to consider, of course, what tools China has to realize

OBOR objectives, what concrete obstacles lie in its path, and what the ultimate prognosis

might be.

Underlying the latent potential for Eurasian continental synergy are deep underlying

complementarities with respect to energy. As noted in Figure 3-1, the nations with the larg-

est populations on earth—China and India—lie almost directly adjacent to the areas—the

Persian Gulf and the former Soviet Union—with the largest reserves of conventional oil

and gas. Across the millennia of human civilization, those complementarities have not been

developed, for a variety of reasons—economic stagnation and under-development; Stalin’s

Socialism in One State policies, which inhibited interdependence; the Sino-Soviet split of

the 1960s, 1970s, and 1980s; and the autarkic impulses of China’s Cultural Revolution, to

mention just a few barriers over the years.

FIGURE 3-1: LATENT ENERGY FOUNDATIONS FOR EURASIAN CONTINENTALISM

Source: U.S. Department Energy, Energy Information Administration International Energy Outlook: BP Statistical Review of World Energy.

46

Over two decades, beginning in the early 1970s, the political geography of Eurasia

began to change, in a series of fateful institutional earthquakes that I have entitled “crit-

ical junctures”.56 The most important developments, presented in Figure 3-2, were Deng

Xiaoping’s Four Modernizations in China (1978); Manmohan Singh’s economic reforms

in India (1991); and the collapse of the Soviet Union, followed by the rise of Vladimir

Putin (1991 and 1999); as well as the Iranian Revolution (1979). Together, these fateful

changes gave birth to a Eurasian continent that was infinitely more rapidly growing, more

interdependent, and turbulent than had been previously true. The changes have rendered

traditional categories for conceptualizing regional affairs and conducting diplomacy, such

as “East Asia”, “South Asia”, “Southeast Asia”, and “the Middle East”, less and less accurate

and operational. Conversely, the critical junctures of the recent past have made trans-conti-

nental analysis—as epitomized in the OBOR concept—increasingly relevant to the actual

emerging realities of Eurasian diplomacy and political economy today.

FIGURE 3-2: CLASSICAL CRITICAL JUNCTURES AND EURASIAN INTERDEPENDENCE

Source: Kent E. Calder. The New Continentalism: Energy and 21st Century Eurasian Geopolitics

56 Calder. The New Continentalism, pp. 50-58.

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CHAPTER THREE: EMERGENCE OF THE NEW CONTINENTALISM

Looking to the future, there is a strong prospect that the rapid growth and deepening

trans-continental interdependence unleashed by the critical junctures of the 1978-1999

period will lead to a trans-figured global energy equation, involving deepened energy links

between Asia and the Persian Gulf. Certainly that is the expectation of the International

Energy Agency (IEA), which is arguably the most authoritative energy forecaster in the

world today. As noted in Figure 3-3, the IEA projects that oil imports into the Asia Pacific

region will rise by more than a third in the two decades up to 2035, while exports from the

Middle East will rise as well.

FIGURE 3-3: PROSPECTS FOR FUTURE ENERGY INTERDEPENDENCE

Source: BP Energy Outlook 2015

The IEA does, of course, also forecast that exports from both North and South America

will also rise. Some of that new oil, much of it produced from shale, will find its way into

East Asian markets. Indeed, South Korea has already contracted to purchase 3.5 million

tons a year of LNG from the Sabine Pass project, operated by Cheniere Energy, which in

48

early 2016 became the first US gas project to actually export LNG.57 Yet the scale of such

exports, unprecedented in the past, are unlikely to loom large in future, in part due to high

fixed costs of handling such exports, prospective volatility in international energy markets,

and continuing competition from low-cost Persian Gulf producers.

As indicated in Figure 3-4, all the major nations of Northeast Asia are heavily depen-

dent on the Persian Gulf for their oil supplies. And that dependence, in the case of Japan

and Korea, has actually been increasing. Meanwhile, Western dependence on the Gulf,

already low relative to that of Asia, has been declining. The gap between Asian reliance

on the Persian Gulf and Western independence thereof has thus been growing greater and

greater. If the shale revolution proceeds more rapidly in North America and Europe than in

Asia, as seems likely, the East-West gap in Persian Gulf dependence will grow greater still.

FIGURE 3-4: A DEEPENING EAST-WEST GAP IN PERSIAN GULF OIL DEPENDENCE

Source: Department of Energy, Energy Information Administration; United Nations, Commodity Trade Statistics, and Planning Commission of India, Integrated Energy Policy: Report of the Expert Commission.

57 The first US shale exports went to Brazil, rather than Asia, but exports to Korea were scheduled to occur soon thereafter. See Eric Yep, “Korean Executive Recommends Limit on Shale-Gas Imports from US”, The Wall Street Journal, March 24, 2014; and Jacob Groenhout-Pedersen, “US exports first shale gas as LNG tanker sails from Sabine Pass terminal”, Reuters, February 24, 2016, at: http://www.reuters.com/article/us-shale-export-idUSKCNOVY08B.

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CHAPTER THREE: EMERGENCE OF THE NEW CONTINENTALISM

China, as also indicated in Figure 3-4 above, is conspicuously less oil-dependent on

the Persian Gulf than its Northeast Asian neighbors, or even than India. Politically inspired

hedging and diversification—away from sea lanes and from a region of the world tradition-

ally dominated by the United States—is no doubt part of the reason. Another factor, how-

ever, is the proximity of Russia, particularly important in energy terms to China north of

Shanghai. Russia, like Central Asian petro-states such as Kazakhstan and Turkmenistan, has

become an increasingly important overland energy partner of China over the past decade.

This trend may well deepen in future, as is discussed later in further detail.

The New Continentalism Broadens Beyond Energy

One powerful initial catalyst for deepening Eurasian interdependence, as suggesting in the

preceding pages, has been energy. The rising demand for steel, petrochemicals, transporta-

tion, consumer goods, and energy-intensive services like air conditioning that high growth

generates naturally provokes deepening ties between energy producers like Russia and the

Persian Gulf nations, on the one hand, and large consumers like China on the other. It also

provokes the construction of long-distance pipelines, as well as large-scale electric-power

transmission grids, to transport energy from one part of Eurasia to another.

Although energy has been a key initial catalyst, the new continentalism has begun to

broaden far beyond the world of energy. Long-distance transportation infrastructure has

been one especially dynamic area. Rapid Asian growth, against the backdrop of underlying

complementarities among land-rich, labor-rich, and capital-rich nations that live side by

side on the Eurasian continent, has created powerful incentives for road and railroad build-

ing, leveraged still further by the stimulus to real-estate prices, as well as heavy industry, that

new transportation infrastructure creates.

Eurasian Geography Reserves a Catalytic Role for China

China is by no means the only nation motivating, or affected by, the new continental-

ism. The creation of a more interactive and dynamically growing Eurasia is a phenomenon

well beyond the capacity of any one nation. China does, however, naturally have a central

50

role in the emergence of a Eurasian continentalism—not only due to its huge population,

increasingly substantial economy, or diplomatic intent. China’s geographic centrality itself

within Asia gives it natural incentives and capabilities to serve as a catalyst for continental

integration.

As is clear from Figure 3-5, China lies at the very heart of the most productive and

highly populated portion of the Eurasian continent. Russia is larger, and has its own geo-

graphic centrality, but lies in a more forbidding and inhospitable portion of the continent,

bordered in the north by the Arctic Ocean, and in the east by the North Pacific. China, by

contrast, is surrounded by major countries, and borders on fourteen nations in all. While

this centrality creates serious security challenges for China, especially where it faces power-

ful neighbors like Russia, it also endows China with a potential leadership role in periods

when it is capable of being strong and assertive.

FIGURE 3-5: THE CENTRAL POSITION OF CHINA ON THE EURASIAN CONTINENT

Source: Kent E. Calder. The New Continentalism; Energy and 21st Century Eurasian Geopolitics

As is also evident from Figure 3-5, China’s geographical profile also makes it a natural

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CHAPTER THREE: EMERGENCE OF THE NEW CONTINENTALISM

conduit between the easternmost reaches of Asia and areas to the west—the Middle East,

Russia, Central Asia, and ultimately Europe as well. Two thirds of the distance between the

Bohai Gulf and the Strait of Hormuz, for example, lies inside China itself. Similarly, nearly

half the distance between China’s east coast and the eastern borders of the European Union

lies inside China, with only two nations—Russia and Belarus—in between. Putin’s creation

of the Eurasian Economic Union will simplify the transit challenge in dealings with Europe

even further: once past Kazakh border formalities at Khorgos, for example, shipments from

China will presumably need only undertake one additional clearance procedure, at the

Belarus western boundary, before entering the European Union itself at the Polish frontier.

China’s policies since 2013 have implied tacit recognition of the momentous politi-

cal-economic changes within Eurasia since the Cold War ended, and have shrewdly capital-

ized on the new geopolitical centrality on the continent that those changes have conferred

on Beijing. Most importantly, of course, President Xi Jinping during the fall of 2013

unveiled the PRC’s “One Belt, One Road” (OBOR) initiative, with two important and

related speeches half a continent apart, in Kazakhstan and Indonesia.58 As suggested in

Figure 3-6, the ambitious program—the details of which are only gradually materializing--

is to involve the comprehensive development of both land and maritime infrastructure

(port facilities as well as superhighways, high-speed railways, and pipelines) linking China

with nations to the we